Working Papers in Economics and Statistics Network Formation with Endogenous Decay University of Innsbruck Working Papers in Economics and Statistics Network Formation with Endogenous Decay

This paper considers a model of economic network characterized by an endogenous architecture and frictions in the relations among agents as described in Bala and Goyal (2000). We propose a similar network model with the difference that frictions in the relations among agents are endogenous. Frictions are modeled as dependent on the result of a coordination game, played by every pair of directly linked agents and characterized by 2 equilibria: one efficient and the other risk dominant. The model has a multiplicity of equilibria and we produce a characterization of those are stochastically stable.

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